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Indian Government’s Draft Gold Monetisation Scheme

Draft Gold Monetisation Scheme

Government of India has come out with draft guidelines of the gold monetisation scheme announced in the Union Budget FY16. Comments on the draft guidelines can be sent to the finance ministry by June 2. Post deliberations on the comments, Government will come out with its final guidelines and run the scheme at few places on a pilot basis.

What is the objective behind such a scheme?

There are three objectives of the schemes: 1) To mobilize idle gold held by households and institutions (temples) in the country. 2) To provide alternate source of gold from banks to the domestic gems and jewellery sector. 3) To reduce reliance on imported gold over time to meet the domestic demand.

What is the background to the scheme?

India is amongst the largest importers of gold. This has contributed significantly to trade imbalances. Current account deficit had reached 6% to GDP in 2013 due to surge in gold imports. Weak external sector also lead to a plunge in the Rupee. Further, affinity towards gold as an investment destination has reduced financial savings in the economy.

What is the scheme?

The scheme works like this: a minimum of 30 grams of gold in jewellery or bullion form is needed to participate. -A preliminary test will be conducted to estimate the amount of pure gold in the jewellery or gold bar. If the customer does not agree with the result, the jewellery will be returned to the customer. -If the customer gives his consent, the jewellery will be melted (in front of the customer) and the customer will be given a certificate of gold deposit, attesting the purity and amount of gold deposited. -Next, the bank will open a Gold Savings Account for the customer, and credit the amount of gold to the customer’s account. Both the interest and principal payment paid to the customer on this account will be valued in gold. For example, if you deposit 100 grams gold, you get 101 grams of gold at the end of year one. The bank will decide the interest you get on the gold deposit. -The tenure of the deposit will be of 1 year and with a roll out in multiples of one year. Like a fixed deposit, breaking of lock-in period will be allowed. – The purity testing centre will transfer the gold to refiners who will store the gold bars in warehouses (unless banks prefer to store it themselves).

So, how would the scheme help the economy?

The estimated stock of gold in India is anywhere between 18,000-20,000 tonnes. Analysts expect a reduction of CAD by 30basis points if the new scheme is able to mobilise even 1% (200 tonnes) of the gold stock. This will have a positive impact on the currency. If the scheme works as intended even gold smuggling will come down in India.

How do individual gold depositors benefit from the scheme?

Gold savings account will be exempt from capital gains tax, wealth tax and income tax. These along with interest rates offered by banks are incentives enough for individual gold depositors to participate in the scheme. Storing gold with the refiners under the scheme will also offer gold depositors a safe place to store gold.

How do banks tend to benefit?

Banks could benefit significantly from the new scheme since the mobilized gold will be considered as a part of CRR/SLR requirements. This will free up resources for banks to lend to other needy sectors.

How will the gems and jewellery sector benefit?

Availability of gold with the banking sector will increase post the positive roll-out of the scheme. This in turn will be made available to the gems and jewellery sector. Secondly, India being one of the largest players in the gold market, the scheme can put negative pressure on international gold prices, lowering the gold cost to the sector and thereby helping exports.

What are the challenges to the success of the scheme?

Gold mobilisation from households will be a major challenge. There are social and cultural reasons for holding gold in India. It remains to be seen if families or temples will be willing to exchange gold for cash or gold bars. Setting up infrastructure for testing gold will also be a challenge. The fees for testing gold and time involved throw their own set of challenges for proper roll-out of the scheme. Smooth roll-out to the scheme will also depend on the attractiveness of the interest rates offered by the banks to gold depositors.

Do we have a precedent to such a scheme?

Yes. There is an existing Gold Deposit Scheme (GDS) introduced in 1999 which is a failure. The new scheme tends to correct the flaws in the earlier scheme. The earlier scheme failed due to high ticket size (500 grams vs. 30 gram now) and longer tenure (3-7 years vs. 1 year now) of deposit. Even the incentives offered to the banks limited its success. Hopes are high that the new scheme will succeed.